REITs are investment trusts that operate much like MFs except for the fact that they invest in income-generating real estate assets and thereby look to generate return for the investors within the fund. REITs make it possible for even the smaller investors to invest in properties

In a move that is expected to ease the real estate sector’s financing woes and help Real Estate Investment Trusts (REITs) take-off, finance minister Arun Jaitley, in his latest Budget announced the exemption of dividend distribution tax (DDT) from the business trust.

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Jaitley had, in his first Budget speech in July 2014, announced that the Centre would provide the necessary tax incentives to REITs. The Securities and Exchange Board of India (Sebi) had notified the regulatory framework for registration and regulation of REITs in India in September 2014. In December 2015, Sebi had also issued a consultation paper on the guidelines for the public issue of units of REITs. Despite these measures, the instrument had failed to kickstart.

What are REITs?

REITs are investment trusts that operate much like mutual funds except for the fact that they invest in income-generating real estate assets — commercial, residential etc — and thereby look to generate return for the investors within the fund. While mutual funds invest in equities, REITs invest in real estate and make it possible for even the smaller investors to invest in properties.

Since REITs invest in completed, revenue generating real estate assets and distribute the major part of the earning among their investors, they will be beneficial not only to the investors but also to the industry as they provide the developer or a private equity (PE) fund an additional avenue to exit thereby providing them the desired liquidity.

The issue of taxation

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Experts say that the way tax was structured on REITs in India, an additional layer of taxation was being enforced and as a result, no firm was launching the product.

Globally, REITs can hold the income-generating asset either directly or through a special purpose vehicle (an SPV is any company where REITs hold controlling interest not less than fifty per cent).

However, when the assets are held through an SPV (as is the case in India) then the company pays corporate tax and thereafter when the income is distributed to the REIT as a shareholder, it suffers dividend distribution tax which is paid by the SPV.

The industry and experts had appealed to the government that levy of DDT at the level of SPV (when it distributes income to business trust) makes the trust structure tax inefficient and adversely impacts the rate of return for the investor. This week, the Budget proposed an “exemption from levy of DDT in respect of distributions made by SPV to the business trust; such dividend received by the business trust and its investor shall not be taxable in the hands of trust or investors.”

Experts say that since the SPV structure has been provided in India, it leads to double taxation. “The SPV first pays tax on its earnings and then it is also subject to DDT when it pays dividend to REITs. By exempting the SPV from DDT in respect of distributions made by SPV to REITs, the whole tax structure has been made more efficient,” said Kalpesh Maroo, Partner, BMR & Associates.

There are others who feel that it will support developers and fund managers to raise funds.

“From the speech of the finance minister, exemption of DDT on the dividend declared by the portfolio company to REIT and InvIT has been proposed. With this amendment, all the required fiscal support for REIT and InvIT to make it a reality has been provided. This will support the developer and fund managers to raise funds through REIT / InvIT and create liquidity,” said, Hemal Mehta, Partner , Deloitte Haskins & Sells.

The other announcements

While the finance minister also announced an extension of tax holiday for units set up in an SEZ up to 2020 and thereby brought cheer to existing SEZ developers, the government announced several measures to push affordable housing. If it announced 100 per cent tax exemption for private players constructing affordable housing of 30 sq

metre in the four metros and 60 sq mt in other cities, approved during the June 2016 to March 2019 period, and completed within three years of construction approval,

the Budget also announced an additional rebate of Rs 50,000 per annum on housing

loan interest for first time home buyers in the affordable segment for loans not exceeding Rs 35 lakh, and for properties not exceeding Rs 50 lakh.

“This move is likely to fuel affordable housing demand, especially in the tier II and III cities of the country,” said Anshuman Magazine, CMD, CBRE South Asia.

Industry players feel that it will result in boosting supply within the affordable segment.

“A 100 per cent deduction to entities engaged in affordable housing coupled with abolition of Service Tax for houses under 60 sq mt will encourage more investment in the Housing for All by 2022. Developers will now look at this segment more seriously and will be compelled to invest and attract better technologies for construction and project management,” said Navin M Raheja, CMD Raheja Developers and chairman advisory council, NAREDCO.

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Other than this, Jaitley also provided a boost to the rental housing market with an increase in House Rent Allowance (HRA) deductions. Those not owning a house and not receiving any HRA from their employers can now avail a standard deduction of Rs 24,000; while for those availing HRA, the limit has been raised to Rs 60,000 per annum towards rent paid for their accommodation.